Earlier this year, commentators compared the frenzied buying of Internet stocks to the biotech bubbles of the early '80s and early '90s. Every bubble does tend to resemble others before it. Even so, each turns out to be unhappy in its own way. A major difference between biotechs and Internet outfits is that the best of the latter not only have a marketable product but also millions of daily or monthly customers. The average investor can at least test-drive the product and develop a fair idea of what he's buying -- or passing up.

By contrast, even the most promising and talked about biotechs often can't be sure they even have a marketable product. Crossing the threshold of Food and Drug Administration (FDA) regulatory approval can create a temporary monopoly for a biotech, a moat with no equivalent among Internet portals or commerce companies. But until a firm gets that nod from the FDA, it has neither a moat nor even a castle. What's worse, even so-called experts don't do so hot at predicting regulatory approval. In that sense, biotech investing seems an order of magnitude riskier than Internet investing. Even knowing as much as you can know, you still don't know much.

The trials of Cephalon(Nasdaq: CEPH) offer a case in point. This development stage company has focused mainly on central nervous system disorders. Myotrophin, its lead drug developed in collaboration with biotech giant Chiron(Nasdaq: CHIR), is designed to treat Amyotrophic Lateral Sclerosis (ALS), a degenerative and ultimately deadly neurological ailment commonly known as Lou Gehrig's disease. Currently, Rhone-Poulenc Rorer's Rilutek is the only drug approved in the U.S. for the treatment of ALS. Cephalon's second drug, Provigil, is for use in the treatment of narcolepsy. In January 1996, Cephalon traded above $40 a share on high hopes for FDA approval of Myotrophin. Since then, it's plunged to $6, not far from its recent low of $3 7/8.

The road to this "bio-wreck" has been paved with unmet expectations. In June 1996, an FDA advisory panel granted Cephalon's treatment investigational new drug (IND) application, which allowed Myotrophin to be offered on a compassionate use basis. However, the panel was unimpressed by the data from the company's two Phase III clinical trials. A North American study showed significant clinical benefit, but a follow-up trial in Europe did not. Death rates in this European trial were actually higher for the patients taking Myotrophin than for those on the placebo. Some observers concurred with Cephalon's view that the European study wasn't large enough to attain statistical significance and that the patients on the therapy were sicker to begin with. The FDA panel agreed that safety wasn't a problem, yet efficacy was. Some panel members wanted Cephalon to conduct a third trial.

With enormous support for the drug from the ALS patient community and political pressure on the FDA to approve the drug, Cephalon stood pat, merely reworking the existing data. The firm's management was so confident that it made a controversial call option bet just prior to the FDA panel's next meeting in May 1997. By a vote of 6 to 3, the panel concluded that there wasn't "substantial evidence" to show the drug was effective. The stock was sliced in half to around $10 a share. Yet some observers still believed that the FDA would approve Myotrophin. The agency usually follows the recommendation of its advisory panels, but the highly political process allows room for the FDA to overrule its panels.

So the saga continued. The shares recovered to $16 by May of this year on anticipation of FDA action on Cephalon's new drug application (NDA). The agency said it was indeed ready to clear the drug but only after it received additional data from the ongoing compassionate use program. This unusual "sorta maybe" okay left investors befuddled. As time passed, it seemed increasingly likely that Cephalon's negotiations with the FDA simply weren't going well.

The shares edged ever lower, with investors discounting the possibility that U.S. approval was dead, but still hoping that the Europeans would clear the drug. That hope was dashed yesterday when Cephalon announced it was withdrawing its application for marketing approval in Europe because a review committee there wasn't convinced the drug works. Cephalon CEO Frank Baldino, Jr. said, "It is not possible to resolve these issues within the time frame allotted to the review process." So for now, the company doesn't plan to pursue the matter further. The stock, which had recently rallied off its lows on expectations of good news, fell $1 3/16 to $5 1/4 on this report.

Some observers argue that Cephalon even now represents an uncommon value. In December, the FDA sent the company an approvable letter for Provigil. The narcolepsy drug could hit the market later this year pending final labeling approval by the FDA. The U.K. and Ireland have also approved the drug. In addition, company spokesperson Jason Rubin told Bloomberg News yesterday that Cephalon has given the FDA the additional data on Myotrophin that the agency requested. "It is our hope that we can get some indication from the agency one way or another this month," he said.

The company has $76.5 million in cash and short-term investments plus another $15.2 million set aside to purchase the rights to Myotrophin, if it is approved. With 28.9 million fully diluted shares at the current price, Cephalon has about $3.21 a share in cash. It also has an accumulated deficit of $246 million, which pretty much eliminates tax obligations for years to come if it can start generating profits. The downside is that the company is still burning cash ($12.6 million in the second quarter); the fully diluted sharecount could jump by 6.2 million shares due to options and warrants if the stock gets above $6.50; and Cephalon will face some other financial obligations if Myotrophin wins approval.

Still, it's enlightening to consider just what a challenge Cephalon has been for the biotech experts.

-- Dr. Harry M. Tracy, editor of the well-regarded NeuroInvestment newsletter, told me in June 1997 that he thought the odds were 2-to-1 in favor of FDA approving Myotrophin by the November 1997 deadline. Instead, Cephalon withdrew and then resubmitted its application to buy more time.

-- Respected biotech investor Sarah Gordon manages money for Amerindo Investment Partners, a major Cephalon investor. In June 1997 she told me that while she didn't think the FDA would approve Myotrophin, she thought the Europeans would. Add in Provigil (which she liked even more than Myotrophin) and she thought Cephalon offered value at $12 a share.

-- Michael Murphy, editor of the California Technology Stock Letter, originally bought Cephalon for his model biotech portfolio at around $11 and bought more at $12 this past April. On March 6, he told readers, "We think the FDA will approve Myotrophin in the next six weeks." On April 3, he assured readers that even if the April meeting of the FDA's advisory panel went poorly, "the FDA would be likely to approve the drug anyway by May 11th based on the new FDA Modernization Act." After the meeting was unexpectedly cancelled, Murphy said he thought this was positive, and he put the odds at 7-to-3 that the FDA would approve by August 11 at the latest. So far, Murphy is down 55% on Cephalon. He recently reiterated his three-year target price of $28.

Some may be more skillful than these experts at analyzing biotechs. Still, I think Cephalon shows that biotech investing is inescapably a guessing game, and one that's easy to lose. After all, you're often forced to guess whether a company even has a marketable product. Of all the challenges you can confront in investing, that's a huge one to start with.